By Tiernan Ray

Shares of AT&T (T) are down 49 cents, or 1.3%, at $36.25, while shares of DirecTV (DTV) are off 66 cents, or 0.8%, at $85.52, after the former said yesterday it will purchase the latter for $48.5 billion in cash and stock and assume DirecTV debt, for a total $67.1 billion transaction.

The tone today, certainly among the bulls, is that the deal is a smart move that would immediately give AT&T more options in serving up nationwide video in a number of fashions.

Raymond James’s Frank Louthan raised his rating on shares of AT&T to Outperform from Market Perform, with a $41 price target, and reiterates an Outperform on DirecTV, writing that “we do not believe another buyer will emerge for DirecTV, but believe the stock will likely trade at a discount to the deal price given the ~12-month timeframe before the deal closes and the potential regulatory overhang.”

He thinks the deal does a lot for AT&T:

One of the key themes we have been advocating for investors is to play the stickier pay-TV and broadband space, and this deal will provide AT&T with a nationwide video footprint to match its nationwide wireless footprint. On a pro forma basis, AT&T would have 29% of its revenue coming from video and broadband, vs. 10% currently. The deal allows for a nationwide triple play product both in and out of the home. Additionally, it gives AT&T the satellite bands to deliver a pay-TV product, potentially freeing up bandwidth on its network for higher U- verse speeds and more data should it need to in the future. While this is a less optimal customer solution for a video/data bundle, we do not believe the company would have any trouble making it work.

Jennifer Fritzsche with Wells Fargo, who has Outperform ratings on both AT&T and Verizon Communications (VZ), writing that the deal makes sense given the convergence of video and mobility:

The immediate reaction by many to a T/DTV deal was – “How does this help T’s wireless business?” No spectrum comes with it, and if anything, this deal seems more to do with wireline than anything. But as we step back and think about the convergence of TV and wireless, it begins to make more sense. While cable has talked much about the desire to get into wireless through its WiFi initiative, the wireless incumbents have a clear time to market advantage today.

She sees the biggest questions coming out of this being how it affects Verizon and T-Mobile U.S. (TMUS) and Sprint (S):

The key question is what does this mean for VZ, S and TMUS in the wake of this news? In terms of VZ, we would be surprised if this deal forces it to make a reactionary transaction. In our view, the No. 1 focus for VZ continues to be on AWS-3 auction (but DISH’s [followed by M. Ryvicker] spectrum would be of interest, as well, in our view). For S and TMUS, we actually believe this news helps (not hurts) their cause for a potential merger. While we recognize that the T/DTV merger is a vertical deal and does not take out a competitor, we think the size of the resulting company very much shines the light on the lack of scale Sprint and TMUS would have in this changing world where enabling OTT, content relationships and wireless scales are hugely important.

On the matter of cable, Evercore Partners‘s Bryan Kraft reiterates an Overweight rating on shares of Comcast (CMCSA), as he cuts the shares of DirecTV to Equal Weight from Overweight, writing that the deal may be good for cable overall, and the Comcast bid for Time Warner Cable (TWC) in particular:

We view this transaction as positive for the cable stocks, particularly CMCSA-TWC, as it will represent a reduction in pay TV competition within U-verse TV areas, which represent about 25% of the country. While AT&T is planning to increase high-speed broadband investment to 15M additional customer premises, primarily through fixed wireless local loop; we continue to believe that cable will maintain an advantage in broadband over fixed wireless and DSL because of its higher capacity, which can better support more bandwidth intensive, constant bit rate applications (namely video). We believe that as video consumption continues to shift toward random access at the expense of linear television, cable MSOs’ broadband network advantage will be further enhanced.

Wunderlich Securities’s Matthew Harrigan cut his rating on DirecTV to Hold from Buy, despite “our enthusiasm for the announced deal,” noting that the 7.7 times Ebitda multiple cited by AT&T in the deal math is “exactly in line” with his own expectations.

Harrigan thinks AT&T couldn’t have gotten the same power in video as it’s getting here, with its other projects:

The provision of 1Gbps speeds off the VIP project to 21 potential new markets would not have offered the national video capability that DirecTV has. Furthermore, waiting for LTE Advanced release 10 for fixed wireless broadband (possible speeds to 100Mbps) necessitates further delays and there are issues for the technology hardening out and for appropriate scaling [...] 4K TV likely requires 10x the speed as current HDTV prior to compression, and perhaps 3x even as compression improves per technical panels that we attended at the Cable Show. Although movies can be compressed to the 15Mbps vicinity, live sports that have to be delivered real time could necessitate 50Mbps vicinity speeds. DirecTV should be best positioned to deliver national 4K linear TV, with many cable companies even now not delivering much 1080P higher quality HDTV.

On a less positive note, Nomura Equity Research‘s Adam Ilkowitz reiterates a Neutral rating on AT&T, writing that the deal is 7.5 times his own projection for DirecTV’s 2015 Ebitda, which is “well above our expected fair value.”

But he sees financial benefit, even if strategy is murkier:

AT&T can inexpensively finance this transaction and drive synergies which make it accretive to EPS and FCF. We estimate this lowers AT&T’s dividend payout ratio by 100-300bp despite the equity issuance, making it financially attractive. Our questions focus on strategy: growing exposure to video, not solving DTV’s broadband problem, and the thoughts around Latin America. We view Europe as firmly off the table with this and coming spectrum auctions [...] AT&T is now the second largest provider of the important consumer telecom services: linear video, wireline broadband, and mobile (still first in wireline voice!). There are clear cost synergies but AT&T is also pushing the video angle in the announcement, in spite of a perceived risk around cord cutting for linear video providers. We look to hear more about the bundling of wireless and satellite TV, and whether the company would expand broadband outside its wireline footprint. AT&T also trades its AMX equity stake for an operating business in LatAm, and we hope to hear if further expansion is likely.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.